Securities Fraud and the Market for Individual Stocks

As long as stock markets have existed, so too have those who invest for  idiosyncratic reasons unrelated to achieving financial returns. Some investors may be motivated by personal utility, others seek to signal loyalty to corporations, some might see their investments as an expression of their faith, others chase the latest fads, and still others simply make uninformed investment choices. Yet until relatively recently, these forms of demand-driven investing have received little attention. Most commentary has either dismissed the phenomenon as noise or attempted to absorb it into existing models of fundamental value-based investing. This Article counters that understanding. It argues that demand-driven investing can create a market for individual stocks that is distinct from noisy trading as well as from fundamental-value-driven trading. This is especially so as the voices of retail investors, social media influencers (“finfluencers”), and other non-traditional, values-driven investors in today’s capital markets have grown in volume and strength. It is increasingly difficult to ignore the investors who systematically choose companies to invest in based on demand-driven factors such as alignment on environmental, social and governance (ESG) issues, an influential investor’s commentary on a security, and preferences between cultural and political values—in addition to seeking financial returns. Understanding the demand-driven component of investor decision-making as creating a market for individual stocks yields fresh insights for today’s stock market information ecosystem and the securities laws’ ability to respond to misinformation within that ecosystem. Specifically, this Article offers a framework to explain how demand-driven investing motivates investors and affects price discovery. This then challenges the limits of existing defenses against misinformation in the securities markets, in particular the scope of Rule 10b-5. Solely protecting financial information results in an incomplete understanding of investor motivations. On the other hand, the idiosyncratic nature of demand-driven investing can make determinations of liability inconsistent and unpredictable. This Article explores the complex doctrinal and policy questions that are implicated.